Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey, everyone.

This is Mark Treichel with another
episode of With Flying Colors.

I'm here today with Steve Farr,
formerly of NCUA and currently of my

team at Credit Union Exam Solutions.

Steve, how are you doing today?

Steve Farrar: I'm doing all right.

Getting used to the colder
weather up here in the north.

Treichel: Yeah, it seems to be
hitting most of the country.

It's it's that time of
year, unfortunately.

But if you like to, snowski,
I guess it's a good thing.

So Steve, today we're going to talk
about the National Credit Union Share

Insurance Fund versus the Deposit
Insurance Fund one of which is for

NCUA and the other is for banks.

And but before we jump into that,
why don't you give a little bit of

your background as it relates to this
topic and or just what you did at N.

C.

U.

A.

in general.

Steve Farrar: Yeah, I decided that
to delve into this topic, it has to

do with my back 30 plus years at N.

C.

U.

A.

and dealing with as a problem case
officer dealing with the assistance that

was offered and available through the N.

C.

U.

S.

I.

F.

And then as my career went on in the
central office, I started dealing with

helping to manage the equity ratio of
the fund and I found myself and a lot of

times doing comparisons to the deposit
insurance fund to, to make sure that

I wasn't missing something that they
were seeing coming along in the future.

Those duties that I had, it made me always
interested in contrasting, comparing the

two funds and thought maybe I'll share
some of that information on this podcast.

Treichel: Yeah, that sounds good.

I'm looking forward to this.

This is right in your wheelhouse from
all that knowledge that not a lot of

people have about one, one or the other,
but because of your role at NCUA you

know a little bit about both of them.

So why don't we, why don't we jump
jump in and talk about what the purpose

of these funds are, which I think a
lot of listeners will know, but it's

a good way to maybe start it off.

Steve Farrar: Yeah, as it goes
back early, they're both set up to

maintain public confidence in the U.

S.

financial system and resolve
failed banks and credit unions.

And so that if you look back prior
to deposit insurance, the banking

and losses, or it was like, operating
in the wild West, either had a good

institution that did fine, or you
were in 1 that involve a lot of fraud

and you ended up losing your deposit.

They wanted to have stabilize
our deposit system and that's

the the use of deposit insurance.

Treichel: Very good.

Yeah, I was watching a
documentary Wyatt on Netflix.

It's a 4 part documentary about the
wild West and it was about Wells Fargo.

And shipping gold from, excuse me,
shipping silver from Arizona and the, the

stagecoach is coming to the East coast
and how that played a role in the U.

S.

financial system in the
economy being built.

And of course, back in the wild
West there was no deposit insurance.

And like you said, if you picked a good
bank that stayed alive you were lucky.

And if you had one that failed,
you could lose your life savings.

So it's a great a great system that
we have here in the United States,

but let's so let's talk about the
National Credit Union Share Insurance

Funds and the principles of it, when
it was started, how all that works.

Steve Farrar: Yeah, it's that one
was back when the Federal Credit

Union Act came into place with,
what, 1934 or something like that.

You might know the exact date.

I didn't write that down.

It was established and it is managed,
the fund is managed by the NCUA board.

And like we say, the purpose to ensure
deposits of all federally insured credit

unions and the thing about it is that
the fund is backed by the full faith and

credit of the United States government,
which is a real important item to have

specifically included in the in the act.

And then, as of I did all the numbers
as of the end of 2023 for comparison

sake, because I could work off of
audited financial statements, the

insured shares at that time were 1.

7 trillion in the credit union system.

So if I go and compare that to the deposit
insurance fund their thing is insures.

Deposits have insured depository
institution and resolve failures upon

appointment as receiver in a manner
that will result in the least possible

cost to the deposit insurance fund.

That's their.

Directive and at the same
on 12 31 23, they had a 10.

6 trillion in their insured deposit.

So it's like 617.

Percent of the insured deposit of
the we'll contrast and compare them

a lot based on kind of those, how
much bigger the deposit insurance

fund is and and so I say, yeah.

Treichel: That's interesting.

And by the way, I don't know the exact
date of when that was signed, but

I do know fun fact that the picture
I use on LinkedIn with me standing

in front of a flag, and I also use
it as advertising for this podcast.

That picture was taken at
NCUA's celebration of the

signing of the Act in 2019.

However many years that would be, it was
some ought five without doing the math,

but but anyway yeah, that's it's been in
place a long time it it ensures a lot of

deposits as the deposit base keeps growing
and that's a good, it's good you've got

that data there so we can walk through it
As we walk through different things here.

So you mentioned that you, you
got involved because of your

understanding of working with
troubled credit unions and providing

insurance and assistance from the N.

C.

U.

S.

I.

F.

Could you touch base on that?

What that actually means
to the for the listeners?

Steve Farrar: Yeah, it is one of
those evolving things and a lot of the

work I did as a problem case officer
in resolving troubled institution

was pre prompt corrective action.

So some of the items that we did then
are less likely to occur now because of

Of the change in capital requirements
but then so he still has the ability to

do the items that were included there.

So items that included assistance
would be waiver of statutory reserve

requirements liquidity assistance in
the form of a guaranteed line of credit.

And that would be as a very last
resort that the insurance fund

would guarantee to land credit.

It would just be for a severe
troubled institution, liquidity

problem cash assistance in the
form of a subordinated note.

And, that would be that, basically,
and so investing in the institution

for a, limited period of time.

1, that doesn't occur much and
it's always a problem thing there.

And that if the government is
supporting an institution, that's

competing against other institutions
that don't have government support.

So that's why that 1 is less
used at this point in time.

And a big 1 that you see a lot is merger
assistance in the form of cast assistance.

Purchase of certain assets by the N.

C.

S.

F.

out of a troubled credit union.

And our guarantees of the values of
certain assets, primarily loans, but

that is the assistance that's available.

Got it

Treichel: And loan guarantees that's
something that did I think quite

a bit before you and I started,
but then it what it happened.

As I recall, is they stopped wanting
to do loan guarantees because it became

complicated for the audits that NCUA
would have done, but the cash assistance.

So those would be examples where Credit
Union A is in danger of closing, has

poor net worth, and NCUA is actually
involved in shopping that institution.

And someone comes in
and prices the assets.

That would be an example
of the merger assistance.

On the liquidity assistance, You
mentioned that's not used that frequently.

It used to be used more.

I remember, back in our problem
case officer and director of special

actions days, you'd get, we'd get phone
calls from the corporate saying, Hey,

this credit union here were worried
about their financial statements

because to get the loans, they would
provide their financial statements.

And then, they would call we would
work with the central office and

then a guarantee would be put in
place where the insurance fund

agreed to guarantee any loss there.

At the end of your career,
was it working different?

It was less frequent, but were
the mechanics generally the same?

The

Steve Farrar: mechanics
would have been the same.

It's just that fewer institutions would
get into that position anymore because.

We, the corrective action
starts so much sooner, right?

And once capital gets below 6, the.

Everybody's Interest gets
elevated and those problems

tend to get resolved quicker.

Treichel: Sure.

Sure.

That goes to prompt correction action,
prompt corrective action, which

requires them to have the capital.

So situations get to a
brought to a head quicker.

Steve Farrar: I was going to buy 1 of
these is like, when we do that, do the.

Merger assistance and then we
sometimes will put them out for

basically competitive bidding.

And anyway, we'd like to do the deals
where you give us the deal as to how much,

what is the assistance that you need and
do the 1 time kind of deal on that because

of the incentive is so great for the.

continuing institution to
maximize the value of that.

And I'll contrast that I'll talk
quick about what the FDIC really

doesn't do assistance because those
are pro for profit institutions.

So they don't tend to want to prop
up for profit institutions versus

ours being non profit, but their
institutions are placed into receivership.

They're currently managing 74.

Active receiver shifts, but they their
resolution and using purchase and

assumption transactions with shared loss
agreements is what they use predominantly.

There's a difference in how liquidations
and resolutions can take place.

Treichel: Got it.

Got it.

NCOA cashes out and
FDIC does loss sharing.

Got it.

Got it.

As far as liquidations and resolutions of
institutions that kind of goes into that.

Is there anything else relative
to that you want to touch on?

Steve Farrar: Yeah, for liquidations
on the NCSAF side they establish

an asset management estate, and
those are generally run by our AMAC.

Down in Texas there.

So it says that unless especially
guaranteed by the NCAA and backed by

the full faith and credit United States,
the AME's unsecured creditors, including

the NCAA could only expect to be paid
if recoveries from the asset management

estate are efficient to be distributed to
unsecured creditors in order of priority,

which is included in the regulations.

In, if not a straight liquidation
and total payout, most.

Liquidations are completed using a
purchase and assumption agreement.

So that there's just a nice kind of clean
break for the continuing institution.

That's only absorbing those
assets and liabilities that

they specifically purchased.

Protects them

Treichel: got it.

Got it.

Yeah.

And if they don't purchase it, exactly
as identified it in the documents.

It falls upon the insurance fund,
which is a smart way to acquire

something if there are unknowns.

So Of course the, you mentioned the
dollars that are in each insurance

fund and they're funded differently.

Credit unions fund the insur,
the N-C-U-S-I Diff, N-C-U-S-I-F

different than how the DIF is funded.

Can you talk through that?

Steve Farrar: Yeah.

This is probably like the single
most different item in between the

two funds is how they're funded.

You're probably aware that, 1%
of insured shares are required to

be deposited into the N-C-S-I-F.

So that is a the lion's share of
the money in the insurance fund.

The NCSF can assess premiums to all
credit unions as provided in the

act, and we'd rarely ever do that.

Investment income is a
big source of funding.

There, when we had guarantee fees that
were, Active in the corporate resolution

that we're providing income to the fund.

And then, of course, as we get
recoveries from the asset management

estates those can can contribute
to provided everybody else has been

been paid according to the priority.

The other source of funding is the
authority to borrow from the treasury and

from the NCOA central liquidity facility.

The NCOA SIF can borrow up to 6
billion from treasury, but in times

of extreme duress, that can be raised,
but that, becomes very difficult

and quite political, at that point.

Treichel: Yeah that's
that's an understatement.

It does become political
back in the great recession.

N.

C.

U.

A.

was using every trick in the book to
try and provide liquidity to the to

credit unions and then also got some
relief through an acts of Congress

that have since sunset, as I recall.

Steve Farrar: Yeah, and the
difference being there that the

deposit insurance fund is primary
source of funding is assessments.

On the insured depository institutions,
and then they're, they have their

interest earned on their investments
and they too can borrow from treasury

and they're borrowing authority
is 100 billion from treasury.

Very much where, they do have significant
more exposure in terms of that too big

to fail type problem that they deal with.

That raises the specter of needs
of extreme amounts of liquidity.

Treichel: Sure.

That, no, that.

That makes good sense.

N.

C.

U.

A.

last recently did their budget
briefing and there's a slide

in their budget briefing where
they compare the costs of N.

C.

U.

A.

's exams and the assessments of F.

D.

I.

C.

and O.

C.

et cetera for operation.

And every year when you, when they show
it, it shows that the cost of being a

credit union is less than the Of being a
bank yeah which is used to calm the nerves

of the trade groups who say NCOA's budget
is too high, which they say every year but

then that data shows some context, there's
peer groups for credit unions, the FDIC

is essentially the only peer group for
NCOA, but that's another Another rabbit

hole that that I thought I'd touch on.

There are, certain statutory ratios
which are required, like the equity

ratio, you mentioned the normal
operating ratio and that you've been

involved in that, that in the past.

And there's something called
the available asset ratio,

which which I'm showing my age.

I'm getting I'm not
remembering that one so much.

So anyway, let's talk through these
statutory ratios a little bit.

Steve Farrar: So each of the fund
does have some statutory ratios that

they have to deal with for the NCSF.

The main one is, it's the equity ratio.

It's the amount of the funds
capitalization, including the

1% capitalization, deposit, and
retained earnings of the fund.

And it says net of direct liabilities
and contingent liabilities for

which no provision has been made.

Now that sounds pretty simple, but there's
been a few times like during 2008 2009,

we're had to deal with what exactly
was the mean net of direct liabilities

and contingent liabilities for which no
provision has been made because we could,

there was some significant exposures
out there that was hard to determine if

they would fall under that or not, but
those were resolved to and this is that's

taken to the aggregate amount of insured
shares and all insured institutions.

Thanks.

Now, if NCOA projects that the
equity ratio will fall below 1.

2 percent within 6 months, the
board must establish and implement a

restoration plan within 90 days that
will return the equity ratio to over 1.

2 percent before the end of an
8 year period, beginning with

the implementation of the fund.

So we did have to do one of those that
back in 2008 or so and I was Worked

closely with some of our other people and
putting that together It what nco is in

pretty good shape on that and you know
through The natural adjustment of the one

percent and improved earnings there wasn't
a lot of additional assessments that had

to be made to get back to that point so
Now the equity ratio is the measurement,

and then NCOA sets the normal operating
ratio using the equity ratio as that

measurement, and the normal operating
ratio means the equity ratio specifies by

the board, which shall not be less than 1.

2 percent and not more than 1.

5%.

The normal operating is NCOA board's
target level for the fund, and the board

has set the normal operating level at 1.

33%.

for your attention.

And at the end of 2023, it was 1.

30 and the board may declare a
distribution for the year end equity

ratio exceeds the normal operating and
the available asset ratio exceeds 1%.

So I might as well explain the
available asset ratio, which is

a lesser known and rarely comes
into play, but it's statutory.

Is the amount determined by subtracting 1,
direct liabilities for which no provision

has been made from the sum of cash and
market value of unencumbered investments

to the aggregate amount of insured
shares, and that must remain above 1%.

And that ratio was 1.

22 percent at December of 2023.

That's the statutory requirements for the.

And so I say F and there are similar
ones for the deposit insurance fund.

They have their equity ratio is called
the designated reserve ratio, and it's

the total of the insurance fund divided by
the total, and they use the term estimated

insured deposits for the industry.

The Act, their act requires the FDIC board
to set a target for the DRR annually.

The FDIC has broad discretion in
managing the deposit insurance fund,

including the level at which the
DRR designated reserve ratio is set.

The required minimum ratio is 1.

35%.

There is no upper limit on the
reserve ratio and thus no statutory

limit on the size of their fund.

The FDIC Act provides for dividends from
the fund when the reserve ratio exceeds 1.

5 percent, but grants the board sole
discretion in determining whether

to suspend or limit the reserve
ratio or payment of dividends.

Under the long range PRI plan, the
FDIC set the DRR at 2% since 2010.

Their analysis using historical fund
and simulated income data from 1950

to 2010 showed that the DRR would have
to exceed, would have had to exceed 2%

before the onset of the two crisis that
occurred during the past 30 years and

have maintain and would have maintained
a positive fund balance and stable

assessment rates throughout the crisis.

Their DR as of 12 31 23 was 1.

15%, so that sounds a little
scary at the end of last year,

but it already increased to 1.

2 percent by 6 by June of 2024.

They have another ratio to I
think a real blaster ratio that

limits the amount of obligations.

The deposit inference fund can incur to
the sum of cash, 90 percent of the fair

value of other assets and the amount
authorized to be borrowed from treasury.

Their minimum obligation
limitation was 210 billion as of.

1231 to 23, so that's the statutory
requirements that kind of drive some

of the decision making that goes on
behind the management of the 2 funds.

Treichel: Got it and I'm going
to paraphrase some things.

You tell me if I got this, right?

So the FDIC has broader
authority to raise.

There's higher.

The F and as of right now.

Or the data that you have the
nearest data that you have the.

Looked at in a vacuum, the NCUSIF appears
stronger just by the math, not looking

at risks and what could impact it,
but the NCUA's reserve is higher than

what you just said the FDIC's is at 1.

2.

Steve Farrar: Yeah,
and we'll go into that.

We're going to discuss the balance sheet
of the 2 funds and I'll explain that

a little bit further as it's related
to recent events more than anything.

Treichel: Got it.

Got it.

And I know you're going to
talk about NCUA assessments.

And I know there's some calculations.

NCUA can only do assessments
at certain times.

And there's certain times that the only
way that the fund can go up is through

earnings off of the fund and operating,
operating at a surplus as opposed to

doing An assessment, whereas the FDIC, it
sounds have such broad discretion while

they might not want to do it politically.

They have more authority in that area.

But when you're walking through
these other topics, if you wanted

to speak to those, feel free to.

Steve Farrar: And to differentiate
the 2 things that you have the N.

C.

U.

A.

assessments.

Which is really the operating fee so that
that, that is, the annual amount that,

that federal credit unions end up paying.

It's on a sliding scale
based on asset size.

And, of course, if you're an
operating credit union, you also

would be paying your, in your estate
charter, you're paying an assessment

to that state regulator also.

Then there's also.

And so as I have premiums, which
are different than assessments,

and those would be specifically
issued to increase the equity.

Level of the fund, and then that
1, what is unique on that is.

The has to charge all credit unions.

The same rate On a premium and versus
banks can do a risk based pricing

on their premiums or assessments.

So right there, because
everybody gets charged the same.

If the fund gets into trouble and
they have to issue premiums, that is

what kind of is a good thing in our
industry that it encourages everybody

to look at your fellow credit unions.

Somebody is taking huge amounts of risk.

And they're large enough to affect
that equity ratio of the funds

should they fail senior best
interest to speak to them about that.

Start with speaking to them
and maybe speaking to the

regular that you have concerns.

I think that's a nice safety
check that's built into the fund.

Treichel: And so Steve, on the
risk based premium, so if a credit

union, excuse me, if a bank.

Does commercial loans and
for some reason they want to.

Provide a different premium for
those credit unions that are doing

commercial loans versus not Fdic has
that ability but ensu aid does not

Steve Farrar: right.

Yep.

They do have a different basis for
how What the assessment rate or

a premium rate is set for them?

Treichel: Got it

Steve Farrar: Yeah,

Treichel: so on occasion ensu is
able to pay dividends on the fund.

Can you walk through how that might work?

Steve Farrar: Really, they could
only do it if the normal operating

level is is above the equity races
above the normal operating level.

And choices we say shall issue a pro rata.

Equity distribution from the insurance
fund to eligible insurance funds

after each calendar year as of the
end of that calendar year, when

the equity ratio exceeds the normal
operating level and the insurance

fund available asset ratio exceeds 1%.

It says per the Federal Credit Union Act,
the NCOA shall distribute the maximum

possible amount that does not reduce the
share insurance fund equity ratio below

the normal operating ratio and does not
reduce the available asset ratio below 1%.

As the fund does very good, and,
share, insured shares aren't

growing at astronomical levels,
and it's not having to do.

Provision expenses there's always the
possibility of insuance dividends.

Treichel: Great point.

And, under the during, since the pandemic.

Share growth and deposit growth has
been controlled, which does have

a, which a controlled denominator
makes the insurance fund stronger.

Again, all other things being equal,
but that kind of is a good spot

to pivot into the balance sheet
and what was on the balance sheet

of the fund at the end of 2023.

Yeah.

Steve Farrar: Okay.

Before we do that, a little bit about
the coming of the differences for the

deposit insurance funds assessment.

Yep.

They have a statement here that their
risk based assessment system allowing

moderate steady assessment rates
throughout the economic cycles is

designed to reduce pro sycticality.

They're there to maintain a positive
fund balance during banking crisis

is due to the 2023 failures.

The FDIC imposed a special assessment to
recover the losses to the insurance fund

arising from the protection of uninsured
depositors, which they did in the case

of, let me make sure you get the names
of that Silicon Valley bank and the

signature bank issues they dealt with.

Yes.

And this is the special assessment
rates would be collected

at an annual rate of 13.

4 basis points over 8 quarterly
assessments since it started this year.

Treichel: Okay.

Very good.

Yeah, I know.

Steve Farrar: Now, they're paying
for those losses that were from

2013 their assessment revenue in
2023, when they had to do some

special assessments was 41Billion.

Compared to kind of 2022,
which was a normal assessment

schedule, which was only 88.

3 billion.

So it shows, they're paying
a lot for, what happened with

those 2 significant failures.

And then for them paying dividend, the
law does allow FDIC to issue dividends if

the designated reserve ratio exceeds 1.

5%.

It says the board does not
intend to issue dividends, but

lower assessments in the future.

If that would happen now, they are
currently operating under a restoration

plan that they had to put together.

And do the extra ordinary growth
and insured shares during 2020 cause

their designated reserve ratio to
decline below the statutory minimum 1.

35%.

As of June of 2020.

In September, the board
adopted a restoration plan to

restore the reserve ratio to 1.

35 percent within eight years.

In 2020, the board approved amended
restoration plan proposed to increase

an initial deposit insurance assessment
rate uniformly at two, two basis points.

So that's how they did it by
increasing their Assessment

rates, and they they do anticipate
reaching the statutory minimum 1.

35 percent by September 30th of 2028.

Wow, it is not fun to be operating under,
it's not fun for a bank to be out or for

a credit union to be operating under a.

A net worth restoration plan.

It's not fun for your regulator to be
operating under a restoration plan.

But what's good for the
goose is good for the gander.

I guess.

Treichel: And I, I'm going to try and
not get up on my soapbox about the

failure of those institutions and.

And how they.

Janet Yellen and came out
and said, it's not a bailout.

It was a bailout.

They bailed out the uninsured depositors
of fintech companies, and it wasn't very

many companies on the West Coast, but they
used an exception that they have to do

it because they didn't want to have the
contagion spread to other institutions.

And 1 of the big credit union different
differentiators other than the insurance

fund is that credit unions don't have
a lot of uninsured deposits compared

to these big banks in some instances.

And that's where these uninsured deposits.

At the banks became so large that they
had to put a plan together that spread

the cost of it over four years, which
should keep the cost of being a credit

union well below the cost of being a bank.

So there is that positive
for credit unions.

So what else, Steve what do you want to
talk about next as it relates to this?

Let's go

Steve Farrar: over their
their balance sheets.

Okay.

It's interesting that they are different.

We've about some of these issues before.

For the N2SIF, It holds 21.

3 billion in intergovernmental
governmental assets.

That's the investment
treasury investments.

It has and keep in mind that the
lion's share of the balance sheet

assets of the N2SAF is the 1 percent
capitalization deposit, and that is 17.

2 billion.

That 1231 23.

And of course, that does, get adjusted
as each year goes along, and it helps

maintain the equity ratio of the fund.

But keep in mind, because that 1
percent also resides on federally

insured credit unions, balance sheet
is an asset that created an issue,

and that is why the minimum net
worth ratio to be well capitalized

is 7 percent for credit unions.

And 6 percent for banks.

It's just strictly because of that 1
percent capitalization deposit, because

if the fund became insolvent and credit
unions would have to write off the

1 percent capitalization posit, then
they would have to, they'd have to

expense that 1 percent and then they'd
have to put a, the 1 percent back

in there again certainly items that.

In the time frame of, 2008 and nine, it
was like, wow, we can't let that happen.

Treichel: The cascading effect.

Yes.

Steve Farrar: Yeah.

Yeah.

And so the, and so that
holds the balance of 21.

4 billion in total assets.

And very little in liabilities for
basically a net position of 21.

2 billion.

Now it's interesting when you start
looking at the deposit insurance

funds balance sheet as of 1231 23.

And it's nice to be able to explain
some of these things that happen.

It, they only held 24 billion
in inter government assets at

the time, treasurer investments.

It's about the same as NCOA.

And then they had 23 billion in an
assessment receivable that they were

able to record as an asset because they
knew the timing and certainty of the

amount of those assessments coming in.

Then they had 98 billion in
receivables from resolutions.

And that is from the 23, 20, 23 failure
of three blanks with over 100 billion

in assets triggered the bailouts.

FTC used emergency authority to
guarantee the uninsured deposits of

Silicon Valley Bank and Signature Bank.

As this illustrates, some
creditors, uninsured depositors,

may receive bailouts.

But others bond holders of the
banks, which were liquidated did not.

So that changed their balance sheet
dramatically, at least for a certain

measurement period, because they
became receivables from resolutions.

Yeah,

Treichel: their audit must be a lot more
complicated today than it was before that.

And a lot more complicated than
NC ways is right now as well.

Yeah.

Steve Farrar: Yeah.

Yeah.

Yeah.

Yeah.

Everything when everything's
running pretty good.

Everything looks really good.

But boy, when we have these, big
items that cause a bit of chaos,

the accounting becomes really
difficult because I know establishing

the accounting for the corporate
resolution fund that was extremely

difficult and required us to, use.

Extremely smart people from outside
the agency to assist with that number

because it just it was very complicated.

Treichel: Yeah, I think
they're those extremely smart

people when they were at N.

C.

U.

A.

There was you could see a
path on the carpet at N.

C.

U.

A.

from your office to where they were.

To where the chief financial
officer, Marianne Woodson was

because those were some hectic times.

Steve Farrar: Yeah, I remember telling
Marianne, you're going to have a tolerance

for ambiguity for a little while.

It goes shortly after she took
the job, when all that happened.

She was great.

Treichel: Yeah, she was.

That sounds like a good band
name, or at least an album.

Tolerance of Ambiguity.

Steve Farrar: Yeah, I'm gonna

Treichel: Google that when
we're when we get off.

Steve Farrar: I think I stole that
probably from Greenspan or somebody

like that But their fund had a hundred
and twenty two billion fund balance And

the thing is you go fast forward by the
middle of 2024, they were back up to

70Billion in intergovernment assets.

And all of that position
was starting to normalize.

But their fund balance is a 574 percent
of the net position of the, so it's,

there's a similarity between the
size difference and insured deposits

and the size of the fund balances.

Treichel: Makes sense.

Makes sense.

So there, there's the operating expenses.

There's the provision for loan loss.

There's other topics along these lines.

What would you like to highlight
relative to the costs and the

operating expenses and the provisions?

Steve Farrar: We're going to
just run through basically the

income statements a way of each of
these items, because, everything

that doesn't go or increase the.

Earnings kind of those funds is money
out of the system, the big topic always

there is, the NCOA and so I said,
operating expenses, because every dollar,

it has to the system has to put in the.

So that is a dollar that's not
available to cover insurance losses.

So it's a big deal.

So the total budget for expenses
and the NCF operating fund were 360

million for 2023 with 1, 214 positions.

The actual total expenses
for 2023 were 377 million.

The thing is they have, NCWA
has that combination of the

operating fund, which takes care
of federally insured credit unions.

And then they have the overhead
transfer rate that And to us is

charged by the operating fund for the
services based on an actual allocation

factor drive for masculine usage
for insurance related activities.

So that money was a 62.

4 percent and going through the
overhead transfer rate is like

a whole discussion upon itself.

Treichel: It is.

Oh, that's a yeah, that's a
that's about a 3 hour podcast.

Steve Farrar: Yeah.

So I just tried to just keep it as
here's this kind of total expenses that.

Yeah, they didn't system that
don't go towards insurance.

And it's that basically
370 million a year.

Joe

Treichel: Rogan can do
a three hour podcast.

Steve, you and I probably
should keep it to keep it short.

Steve Farrar: The total expenses
for the deposit insurance fund

operating expenses in 2023 were 2.

8 billion.

And that their staffing level was
That's 6, 817 or we get back to

the same percentage as you see all
the time, 561 percent of NCOA stat.

So you'll see that, follow along with
almost all these measurements and that

The doesn't appear really out of step
and they're in agreement with each other

as level staffing and some of these
other measures that that we look at.

Treichel: Got it.

Got it.

Steve Farrar: The other item that
of course, comes into play is, each

of these funds has exposure to loss.

And they both estimate losses determined
on a funds reserve methodology.

And I was highly involved in, Moving into
a pre CECIL as to how we would do it and

the, losses given default and all those,
the calculations that came into play.

And I remember we were, we're working
in a room with a lot of people working

on on that analysis and complication.

And we worked together and we'd ran some
simulation and we found that changing

some element had changed a factor out
in a way out in a further decimal place.

And they're all really happy about it.

Oh, look at this improvement that we made.

And I was like, yeah, and if
I jump, I'm closer to the sun,

it was like, I think we're there.

I think we have a really good system
if we are happy about something

changing a way out denominator.

But those are, that is a
process that both of them do.

It's similar to what credit unions
do for their provision for losses.

And so they only had 3 failures in 2023.

6 in 2022 the cost of 1.

4 million is all in 2023 and 9.

8 million in 2022 at the end of 2023, 1
credit unit was in conservatorship the

provision expense in 2023 was negative.

12 million and it was a negative 39
million 2022, meaning that the losses

are less than what the analysis was
per was projecting and the institutions

that generally were improving.

So

Treichel: were you what back in the
corporate crisis and the, the, you had

the audits that that you were involved in.

I remember from afar not from far, but
from afar that there was discussions

about should NCUA have to consolidate
their financial statement, the

conserved credit union's financial
statements into the insurance fund.

And it was concluded, it was a scary time.

Because if that was the conclusion,
it was going to impact the numbers

negatively, but they landed on the
fact that they didn't have to do that.

Do you recall any specifics tied to that?

Steve Farrar: I do remember that
discussion and because there

was a chance that would create.

Such gyrations in both, both the,
our, because if we'd have to do it,

it'd be, we would tend to follow that
FDIC was doing something similar.

And you can see the gyration they had.

Just with what they did in 2023, if
you add that, you'd be like, these

funds would be jumping all over up
and down all the time, and it probably

would go against that very 1st thing.

That we're supposed to maintain
public confidence in the U.

S.

financial system.

And these wide gyrations just
aren't consistent with that.

Treichel: No, I like that.

I like that.

As far as investments that they
can make, we've talked about the

costs and the losses and everything.

Any thoughts on the invest,
so the asset side and what

the insurance fund invests in?

Steve Farrar: It is, there is, there's
some similarity in, in, that we can

all only invest in basically treasury
instruments and generally the treasurer

doesn't want the, these type of, our
type of institutions doing trading of the

government securities or, operating on,
on selling and and then rebuying them.

They don't they didn't care for that.

When it's interesting that the investment
income for the insurance fund was 432

million in 2023 and 287 million in 2022 as
rates went up it fund earned a lot more.

The, it's interesting that the weighted
average investment maturity for the

fund in 2023 was 33 years, but you
compare it to what FDIC because of

what they were dealing with at the
end of 23, they were down to 0.

21 years.

Now the, it's, it is interesting
also because of what they held.

They only were, seemed to be holding
some really high yielding stuff.

Their rated average yield was 4.

66 at the end of 2023 on a much smaller
denominator than they normally had.

And the weighted average
yield for the NCSF was 2.

33%.

Treichel: That's because of the ladder
that NCOA had the, I don't know.

Yeah, NCOA does have

Steve Farrar: the investment
strategy that's put together.

It generally had been a laddering
when I was involved in it.

I think they've done some adjustments
to that, but I haven't kept up

exactly what the sure nuances
of the investment strategy are.

Very good.

It comes down to, so who's better?

They're both very healthy and both able to
react with the situations that they have.

So they're really hard to
compare in terms of who's better.

They're similar, but different.

And we thought that might be useful
information for this podcast.

Treichel: Very good.

You reminded me of a, of an Alan Parsons
songs that I won't bore people with, but

then the same with no, I guess I will
bore him same with no similarity is the

line of the song I'm thinking about, but

Steve Farrar: yeah,

Treichel: very good.

Steve, that was there was a lot of
chock full information there that that.

that basically points out, like you said
at the end, you wrapped it up very well.

There are two very good funds that
serve this country well, serve the

economic engine of the country.

Served us well when we were at N.

C.

U.

A.

And we'll be robust into
the future, hopefully.

Want to thank you as always for
your thoughtful analysis of this.

And listeners, I want to thank
you for listening as always.

This is Mark Treichel signing
off with Flying Colors.